Question

The goal of "maximization of the shareholders' wealth" is an adequate goal for a project. Do you agree? If you dont explain your justtification

(please explain in detail)

Answer 1

Answer to Question:

The term wealth means shareholder's wealth or the wealth of the person who are involved in the business concern. This is known as value maximisation or net present value(NPV) maximisation , where NPV is the difference between the present value of benefits realized and the present value of cost incurred by a business. Its main objective is to acheive highest market value of common stock and varies in nature of profit maximisation where main objective seems to be earning large amount of profit

Favorable arguments to support that wealth maximisation is the adequate goal for a project:

• It is distinct and simple to understand.
• It considers time value of money and risks of business concern.
• It considers the quantity and quality of benefits received by the firm.
• Shareholder's wealth is maximised when price per share is maximised.
• It promotes and improves optimum and efficient utilisation of resources.
• It ensures economic interest of its stakeholders.
• It is based on long terms goals of the project
• It recognises risk and uncertainity.
• It recognises timings of returns at various intervals.
• It does not encourages unsocial & bad earning habits and does not give rise to corrupt practices and unfair trade.
• It serves the interest of supplier, financiers, employees , management etc.

There will always be a contradiction about which goal is the ultimate goal , whether its profit maximisation or wealth maximisation . It is always maximisation of shareholders wealth which is the ulimate goal of a project. For, day to day decision making Profit maximisation can be taken into consideration as a sole parameter however long term goals and aspiration of a project to be successful is to be acheived only by improving and enhancing shareholder's wealth.